Caterpillar Goodwill Writedown Exceeds Unit’s Carrying Value

Caterpillar Inc. wrote down the goodwill from a recent acquisition in China, and then some.

The construction-and-mining equipment maker confirmed on Monday its projection earlier this month for a $580 million, fourth-quarter goodwill writedown related to an alleged accounting fraud at a Chinese maker of hydraulic roof supports, used in underground coal mining, that it bought last year. The amount it is writing down well exceeds the $476 million of goodwill – an intangible asset that represents the amount of the purchase price that exceeds tangible assets and intangibles that can be identified – that it booked along with the roughly $690 million purchase.

According to two equity analysts Caterpillar said the difference was possible because accounting rules allow a one-year period after a merger for companies to reconcile the balance sheet of an acquired company. Lawrence De Maria of William Blair and Theoni Pilarinos of Raymond James told CFO Journal that Caterpillar officials cited this allowance in separate conversations following the release of results.

Robert Willens, an accounting and tax expert with Robert Willens LLC, said a company has a year after a deal’s closing date to confirm “conditions that existed at closing,” as opposed to those caused by events subsequent to the acquisition.

A company spokesman said in an email that Caterpillar won’t disclose any more about the $104-million discrepancy until it files its annual report with the Securities and Exchange Commission. The annual filing has been filed in late February for the past several years.

Caterpillar has said that it identified discrepancies beginning in November at ERA Mining Machinery Ltd., more commonly known as Siwei, “between the inventory recorded” and the actual physical inventory. Also, the company “identified inappropriate accounting practices involving improper cost allocation that resulted in overstated profit” as well as “practices involving early and, at times unsupported, revenue recognition,” it said in a January 18 press release.

Caterpillar said a federal filing in November that it acquired $94 million in tangible inventory in the Siwei deal. Caterpillar also said that it booked $194 million in finite-lived intangible assets in the acquisition, primarily related to customer relationships and trade names.

Mr. Willens speculated that Caterpillar would include some identifiable intangibles in the write-off. He said the U.S. Internal Revenue Service has historically said that customer-based intangibles are “inseparable from goodwill,” so “if a goodwill write-down is called for, it would follow that a write-down of closely related, inseparable, assets, like customer structure, should also be written down.”

Comments (1 of 1)

Bet there are other issues that were found...contracts/backlog booked at a loss (reserves are required), massive bad debt reserves for questionable AR, inventory write downs to reflect lower cost/market, unrecognized liabilities such as warranties, etc.

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